Friday, 19 July 2013

30X your money with no effort or risk

The market is a magic mystery box the vested-interest shills encourage everyone to put their pension money into, promising to turn $10,000 into $300,000 over 30 years. But if everyone does this, where will all that money come from in the end? The shills never answer that question. Their best attempt is that the increase in mandatory superannuation contributions from 9% to 12% will allow this, like a chain letter works. Everyone liked the fantasy of an assured 30 times their money with no effort or risk. Investors could save less and spend more, the financial sector could charge huge fees from this sure thing, governments and corporations need not plan for pensions, everyone could just rely on the magic mystery box. And since everyone was all in, when the market did not meet the required return, it was forced to do so. 

The current consensus is that higher share prices, even when not accompanied by higher productive capability or cash flow, always are a good thing, and everyone should be happy if the market goes upward, regardless of why. It is certainly possible to force nominal prices to whatever level is desired. But if a nation's wealth on paper grows faster than its actual stuff, what happens when people eventually try to convert wealth into stuff? Higher prices unbacked by fundamentals are not a good thing, inflated prices are actually an extremely bad thing. This concept that would astound (and potentially exceed the admittedly limited cognitive ability of) most Australian sharemarket commentators that unconditionally equate 'up' with 'good'.

Higher prices are easily accomplished in a market where intermediaries control the entry price for granny investors. In the short term, the Australian sharemarket is controlled by an oligopoly of major banks and fund managers, that accounts for the majority of shares outstanding and trading. The oligopoly has a strong net interest in increasing daily prices, since higher prices translate into higher fees and lures new investor inflows, and are supported in this by sundry government policies. Most intermediaries in the finance industry, its regulators, analysts and financial media shares this implicit interest in gradually higher prices, and so there is a constant upward pressure on share prices. This explains some of the more ridiculous price action on the ASX.

In the long term, the oligopoly's ability to push the sharemarket upward is constrained by net cash outflows and the availability of debt. Prices are manipulated upward as far as it is possible, until outflows force the oligopoly to set a lower level. In periods of net pension fund inflows to the market, when total salary contributions are greater than pensioner cashouts, not only can prices easily be driven upward, but there are enormous profits to be made doing so. Increasing debt is the second main driver of the sharemarket, with the performance of the underlying businesses now completely irrelevant to the performance of the magic mystery box.

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